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Thursday, December 26, 2013

DBS -Still The Best Bet (DMG)

DBS
Target Price: SGD19.40
Price: SGD16.74
Still The Best Bet

Despite moderating loan and non-interest income growth, we expect DBS to sustain its 7% net profit growth in FY14F. Stable NIMs and credit cost, as well as positive jaws are expected to help cushion the weaker topline growth. DBS offers strong leverage to the interest rate upcycle. While rate hikes are only expected in 2015, the stock cannot be ignored, in our view. Maintain BUY, with a SGD19.40 FV.

¨ Looking ahead to 2014, DBS guided for 8-10% loan growth, down from the mid-high teens expected for 2013. The slowdown would partly be attributed to a moderation in mortgages as the property cooling measures have resulted in a 30% y-o-y decline in new mortgage booking this year. In addition, the lumpy M&A loans extended this year could potentially impact growth when fully repaid. NIMs are expected to fluctuate around current levels (3Q13: 1.6%), while the loan-to-deposit ratio (LDR) remains comfortable, with group, SGD and USD LDRs at 89.5%, 72.5% and 133% respectively as at end-Sept 2013. Finally, DBS expects to be able to keep a lid on operating expenses next year (ie jaws positive), while loan provisioning is expected to be stable as asset quality remains benign.

¨ Forecasts. We expect DBS to sustain its FY13F core net profit growth of 7% y-o-y in FY14F. While we project a slight slowdown in underlying operating income (FY13F: +11% y-o-y vs FY14F: +9% y-o-y) due to slowing non-interest income growth, this would be compensated by positive jaws (FY13F cost/income ratio (CIR) of 43% vs FY14F: 42%) and stable overall credit cost of around 32bps.

¨ Investment case. Our SGD19.40 FV is based on a target 2014 P/BV multiple of 1.3x (in line with the stock’s 10-year average). We continue to like DBS for its stronger earnings growth and cheaper valuations relative to peers. The bank is also less vulnerable to policy changes in the property market sector given its relatively smaller exposure to the segment. Finally, the bank will also be a key beneficiary when short-term rates start to rise. Maintain BUY call on the stock.

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